Like other mature industries, the construction and engineering (C&E) sector is experiencing a wave of baby boomer retirements. It’s affecting businesses in broad operational terms, as boomers make up a significant proportion of the workforce.
But if you’re a construction company owner who wants to retire someday soon (i.e. within the next few years), the issue is personal. And it starts with the tough time you might have finding a buyer in the first place.
The cyclical nature of your business, the impact of current inflation and interest rates, and impending retirements of baby-boomer workers can make it difficult for prospective third-party buyers to get an accurate read on your company’s current value and its future growth potential.
In the meantime, a skilled worker shortage could stretch budgets and timelines on current and future projects — adding further uncertainty to future business value.
Ready for a little good news? Consider this: Management employee buyouts, offers from strategic buyers, and private equity offers aren’t your only options.
If you could create your own buyer, one that could guarantee fair market value for your construction business, why wouldn’t you?
An employee stock ownership plan (ESOP) can do just that — while establishing a qualified retirement plan that can help your employees build wealth and improve their retirement security. It’s the kind of valuable employee benefit that helps attract and hold onto skilled employees, so projects aren’t slowed down by positions left unfilled.
If you’re investigating your options for selling your construction business and you’re ready to start your leadership succession plan, here are 8 reasons an employee stock ownership plan (ESOP) deserves major consideration in your process:
1. You Can Create Your Own Buyer
Any change introduces uncertainty, but implementing an ESOP can reduce organizational anxiety around the sale transaction. You don’t have to worry about whether it might take years to find a buyer.
And because an ESOP sale creates a buyer and follows a clear and predictable process, everyone can contribute to an ownership transition that doesn’t make sudden changes to business operations, strategies, or culture. Plus, by eliminating third-party buyers, an ESOP sale reduces the likelihood of drastic decisions by outsiders that could impact company stability.
2. Get Full Fair Market Value for Your Business
An asset-intensive, seasonal, cyclical business like construction can make for a hard sell when it comes to private equity or third-party buyers. Valuation can be complex, and it can be tough to illustrate value to an outsider.
But an independent business valuation is a key step in the ESOP process that guarantees full fair market value at the sale of your construction and engineering company.
It’s a third-party validated process that helps protect your financial reward for the time and effort you’ve invested in building the company, and can also help instill confidence in employees, as they can see clear evidence of the company’s value — whereas third-party and private equity transactions can lead to questions over the health of the business.
3. Maintain Leadership Control
The ESOP option gives you choice over when and how to make your exit, so you can make a gradual departure while upholding the culture that’s been central to your success. That gives you time to build and execute a succession plan, mentor future leaders as the ESOP unfolds, and make sure the values that drive your company are passed on to the next generation of management.
That means your team faces less uncertainty in the ownership transition — and that can reduce losses to attrition over the ownership transition. You can help secure the company’s future, even while making your exit.
4. Attract and Retain a Quality Workforce
Construction projects can’t be completed without the people who do the work. As baby boomers retire, attracting and retaining top talent becomes increasingly important. And an ongoing shortage of skilled trades workers is felt acutely in construction.
Attracting new talent to replace retiring workers can be a little easier with a valuable qualified retirement plan benefit. Most ESOP companies also offer 401(k) plans, so the ESOP is often a very attractive “cherry on top” for recruiting that becomes much more meaningful to employees as they stay on, become vested, and internalize ownership culture.
Offering employees an ownership stake in the company makes your business a more attractive workplace for potential hires, helping you secure the skilled workforce necessary to keep your company thriving in the face of the baby boomer retirement wave.
5. Establish a Strong Cash Position for Ongoing Growth
An ESOP company’s tax savings can strengthen its cash position, allowing it to more comfortably and flexibly afford future investments like equipment purchases, and stay competitive in the market over the long term.
That can make it easier to invest in the new technologies, property, equipment, and surety bonds every construction business needs to stay competitive, secure contracts, and keep growing through economic ups and downs.
6. Share Wide-Ranging Tax Benefits
ESOPs offer significant tax benefits for the selling business owner and family members, the ESOP-owned company after the sale, and ESOP plan participants. As a selling owner, you may be able to defer or avoid capital gains taxes — in fact, selling to an ESOP could net more after taxes than a third-party sale, even if fair market value is lower than a third-party offer.
ESOP-owned S corporations aren’t subject to federal income tax, and ESOP-owned C corps can deduct plan contributions. And finally, ESOP plan participants can benefit from tax-deferred growth on their ESOP shares — so they can build future wealth while employed with the company.
7. Support Project Continuity & Company Stability
Employee retention is crucial in construction and engineering to keep projects on schedule and continue driving growth. By implementing an ESOP, you protect the continuity of projects and leadership, keeping your company prepared for opportunities that arise in a changing economic landscape.
An ESOP can serve as a powerful incentive for employees to remain committed to the company. Every employee-owner learns to see their role in the context of supporting a productive, successful business. This fosters a sense of company pride, ownership culture, and closer cooperation to get the job done safely, efficiently, and profitably.
8. Create Legacy of Generosity & Gratitude
Many construction companies are held in high esteem in their local communities. They’re often seen as more than just an employer — after all, they’ve literally contributed to building the communities they call home.
Leaving an employee-owned construction company in place and operating with cultural continuity means you can retire knowing a local community employer remains strong. Giving beneficial ownership to your employees, whose work and dedication helped build the business, can be especially rewarding, and the wealth they build can continue to positively impact your community for generations to come.
Is your construction company a good candidate for an ESOP sale? It’s easy to find out. Start by taking our simple quiz. Just click the link below to get started.
